(Updates with Bank of America memo to employees, Barofsky's opposition to forbearance, starting in 13th paragraph.)

Sept. 2 (Bloomberg) -- Bank of America Corp. and JPMorgan Chase & Co. are among lenders that may face a lawsuit by the U.S. Federal Housing Finance Agency over faulty mortgage loans, according to six people with knowledge of the matter.

The agency representing Fannie Mae and Freddie Mac is likely to act before next week's deadline for legal claims, according to the people, who weren't authorized to speak publicly. The amount may dwarf the $20 billion sought from the biggest mortgage servicers in a separate probe of lending and foreclosures by 50 state attorneys general, one person said.

Bank of America led declines in shares of U.S. lenders after the suit was reported in the New York Times earlier today. The FHFA has been demanding refunds from banks for loans sold to Fannie Mae and Freddie Mac that were based on false or missing information about borrowers and properties. The two government- backed mortgage finance firms had to be rescued by taxpayers as defaults on home loans soared toward record levels.

A lawsuit is an uncertainty that can go on for years -- that gets the market quite nervous, said Nader Naeimi, a Sydney-based strategist for AMP Capital Investors Ltd., which manages almost $100 billion. Bank of America, being at the epicenter of these problems, is going to get smashed.

Bank of America, based in Charlotte, North Carolina and the largest U.S. lender by assets, fell 66 cents, or 8.3 percent, to $7.25 at 3:27 p.m. in New York Stock Exchange composite trading. JPMorgan and Citigroup Inc., both based in New York, slipped more than 4.5 percent, while San Francisco-based Wells Fargo & Co., the biggest U.S. home lender, declined 4.4 percent.

Pressure on Shares

Any bad news such as new lawsuits is inevitably going to put the stock under pressure, said Richard Staite, an analyst at Atlantic Equities in London, referring to Bank of America. There is a question hanging over the company as to whether it needs to raise new equity. If the lawsuit was to result in significant new losses, then it becomes more likely that the company might need to raise equity, which would be a difficult thing to do in the current market.

Bank of America, JPMorgan, Goldman Sachs Group Inc. and Deutsche Bank AG are among firms that may be sued by the agency for misrepresenting the quality of mortgage securities sold at the height of the housing bubble, the Times said. Morgan Stanley is likely to be included in the lawsuit, according to one of the people.

Mortgage Overhang

A separate report in the Wall Street Journal said Bank of America was told by the Federal Reserve to explain what steps it would take if its financial condition worsens. Chief Executive Officer Brian T. Moynihan has committed more than $30 billion to quelling claims for faulty mortgages since he took the top job in 2010.

It doesn't surprise me when we wake up and there's somebody else trying to sue them, said Marty Mosby, a Nashville, Tennessee-based analyst with Guggenheim Securities LLC. The overhang and the pressure related to this residential real estate isn't going away any time soon.

US Sues Bank Of America...U.S. sues Bank of America for more than $1 billion for mortgage fraud10/24/2012  The top federal prosecutor in Manhattan sued Bank of America for more than $1 billion on Wednesday for mortgage fraud against Fannie Mae and Freddie Mac during the years around the financial crisis.

U.S. Attorney Preet Bharara said Countrywide Financial, which was later bought by Bank of America, churned out mortgage loans from 2007 to 2009 without making sure that borrowers could afford them. "The fraudulent conduct alleged in today's complaint was spectacularly brazen in scope," Bharara said in a statement. He said the suit was partly to recover money that Fannie and Freddie lost from defaulted loans. Bank of America had no immediate comment.

Countrywide sold the loans to Fannie Mae and Freddie Mac, which were left to pay for the loans when they defaulted, according to the lawsuit. Fannie and Freddie were effectively nationalized in 2008. According to the lawsuit, Countrywide used a process called "the Hustle," shorthand for "High-Speed Swim Lane." The idea was that mortgage loans, as they were being processed, would "move forward, never backward." The lawsuit alleged that Countrywide traded quantity for quality and eliminated underwriters, even from mortgage loans for which borrowers did not have to get their income verified.

Instead, loan processors simply entered data into an automated underwriting system, and if the system gave the go-ahead, "no underwriter would ever see the loan," the lawsuit alleged. With few checks and balances, there was "widespread falsification" of the data entered into the program, Bharara charged.

Loan processors were given little guidance, the suit said: Checklists for making sure that loans were compliant  for example, assessing whether the income level that a borrower listed was reasonable  were eliminated. Bonuses were based solely on how many loans an employee could process, not the quality.

Banks slow to pay out mortgage relief funds...Behind the mortgage settlements from the housing crisisMay 19,`13 - Banks have paid less than half the $5.7 billion in cash owed to troubled homeowners under nearly 30 settlements brokered by the government since 2008, delaying help to the millions of victims of discrimination and shoddy lending that epitomized the housing crisis, according to a Washington Post analysis of government data.

When the settlements were announced, with great fanfare, government officials hailed them as the long-promised reckoning with the financial industry. Regulators found that some banks had saddled borrowers with unaffordable mortgages or assigned higher rates to minorities even when they qualified for a better deal. Some banks were accused of having employees robo-sign foreclosure documents without reading them or having proper documentation. But consumer advocates and lawmakers have grown increasingly frustrated by the delays in releasing the settlement funds, which they say are making it difficult for some borrowers to recover financially.

In 2011, Wells Fargo agreed to compensate up to 10,000 borrowers after the Federal Reserve found the bank was steering them into subprime loans even though they qualified for better mortgages. But no borrowers have received money yet. Last year, Bank of America agreed to pay some borrowers between $1,000 and $5,000 for what the Justice Department called lending discrimination. The agency said the bank illegally asked some would-be home buyers who relied on disability income to provide a doctors letter verifying the severity of their ailment. But its still unclear how many people will ultimately be paid. There isnt a full list of the victims.

Over the past few years, there have been a string of government cases against financial powerhouses for the sins of the financial crisis. Heres a look at some of the largest cases to have been settled or filed so far.

The agreements are coming under increased scrutiny from state authorities who are concerned the banks are not living up to their obligations to help homeowners. The New York attorney general recently threatened to take Bank of America and Wells Fargo to court to force the banks to comply with a large national agreement to offer struggling borrowers help. These settlements are a reflection of the dismal response from the federal government and the banks to consumers who got bad mortgages, said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer advocacy group. Their needs got pushed behind taking care of the banks.

Banking industry officials and regulators say the scale and complexity of the settlements have grown over the years, making them difficult to execute quickly. They can involve multiple agencies, banks, lawyers and consultants. In some cases, banks are still identifying people affected or waiting for borrowers to respond to notifications of eligibility. There are also a number of cases in which banks have yet to zero in on how much they will pay out.

Useful Searches

About USMessageBoard.com

USMessageBoard.com was founded in 2003 with the intent of allowing all voices to be heard. With a wildly diverse community from all sides of the political spectrum, USMessageBoard.com continues to build on that tradition. We welcome everyone despite political and/or religious beliefs, and we continue to encourage the right to free speech.

Come on in and join the discussion. Thank you for stopping by USMessageBoard.com!